Question 1

Which of the following best describes the law of diminishing marginal utility?

Accepted Answer

As a consumer consumes more units of a good, the marginal utility from each additional unit decreases.

Question 2

Suppose a consumer spends all their income on two goods, X and Y. The price of X is $4 and the price of Y is $2. If the marginal utility of the last unit of X consumed is 20 and the marginal utility of the last unit of Y consumed is 10, is the consumer maximizing utility?

Accepted Answer

No, because the marginal utility per dollar spent is higher for Y than for X.

Question 3

What is the utility-maximizing condition for two goods, X and Y?

Accepted Answer

The consumer should allocate spending so that $ \frac{MU_X}{P_X} = \frac{MU_Y}{P_Y} $.

Question 4

If the price of a normal good decreases, which of the following statements is true regarding the income and substitution effects?

Accepted Answer

Both the income and substitution effects will increase the quantity demanded.

Question 5

A Giffen good is characterized by which of the following?

Accepted Answer

A positively sloped demand curve because the income effect outweighs the substitution effect for an inferior good.

Question 6

Which of the following best explains why water, which is essential to life, has a low price while diamonds, which are not essential, have a high price?

Accepted Answer

Because the supply of water is much greater than the supply of diamonds.

Question 7

If a consumer’s marginal utility per dollar spent on juice is greater than that for burritos, what should the consumer do to maximize utility?

Accepted Answer

Buy more juice and less burritos.

Question 8

Which of the following is the correct formula for consumer surplus for a given quantity $ Q $ and market price $ P_0 $?

Accepted Answer

The area under the demand curve and above the price line up to $ Q $.

Question 9

Suppose the price of ice cream falls. Which of the following best describes the substitution effect?

Accepted Answer

The consumer buys more ice cream because its relative price has fallen compared to other goods.

Question 10

If the marginal utility of the last dollar spent on good X is less than that of good Y, what will a rational consumer do?

Accepted Answer

Buy more of good Y and less of good X.

Question 11

Which of the following statements about consumer surplus is correct?

Accepted Answer

Consumer surplus is the difference between the total value consumers place on all units consumed and the payment they actually make.

Question 12

Which of the following is NOT an assumption of the utility-maximizing model of consumer behavior?

Accepted Answer

Consumers always know and calculate the marginal utility per dollar for every good.

Question 13

If the price of an inferior good decreases, what is the likely effect on quantity demanded?

Accepted Answer

The substitution effect increases quantity demanded, while the income effect decreases it.

Question 14

Which of the following best describes conspicuous consumption goods?

Accepted Answer

Goods consumed because their high price confers status.

Question 15

A consumer is maximizing utility when:

Accepted Answer

$ \frac{MU_X}{P_X} = \frac{MU_Y}{P_Y} $ for all goods.

Question 16

Which of the following is a real-world example of the income effect?

Accepted Answer

A consumer buys more of all normal goods when their salary increases.

Question 17

If a good takes up a large proportion of a household’s budget and is an inferior good, which of the following is most likely?

Accepted Answer

The income effect may outweigh the substitution effect, possibly making the good a Giffen good.

Question 18

Which of the following best describes the market demand curve?

Accepted Answer

It is the horizontal sum of all individual demand curves.

Question 19

If the marginal utility of the last dollar spent on good X is 8 and on good Y is 12, and both goods cost $2, what should the consumer do?

Accepted Answer

Buy more of good Y and less of good X.

Consumer Behaviour: Utility, Demand, and Consumer Surplus

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